SELECTING THE SUPPLY CHAIN FINANCING MODE UNDER PRICE-SENSITIVE DEMAND: CONFIRMED WAREHOUSE FINANCING VS. TRADE CREDIT

Abstract

In a product market with price-sensitive demand, we examine a supply chain consisting of one manufacturer and one capital-constrained retailer. The retailer may purchase by borrowing by securing confirmed warehouse financing (CWF) from a competitive bank or the manufacturer's trade credit financing (TCF), provided that it is also to the latter's benefit to extend TCF. We obtain the manufacturer's optimal pricing decision in the two financing modes under the wholesale price contract that coordinates the supply chain given a wider range of wholesale prices in CWF. We find that CWF is more suitable for the customer segment for which the unit retail price is low and demand is stable, so the pro duct can be monetized quickly; TCF is suitable for the customer segment for which the unit retail price is high and has a high price elasticity of demand and hence for long-term investment. The repurchase price is an important factor affecting the participants' selection of CWF.